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Profitable Do-It-Yourself Investing
by Robert B. Gordon,
Sc. D.
June 20, 2004
I have never read any reports on the actual returns of small public investors, but from my knowledge of when the masses do their buying and selling, they must generate serious losses on average over any 30 year time period. There is, of course, a very good time to buy early in every major market cycle and an even better time to sell before it ends. But from mutual fund sales figures it’s easy to see that most mass buying occurs late in the bull market period and heaviest just before the price drop. There is then a long passage of time, usually several decades, before active buying returns.
Since we are now in the fifth year of what will probably be a very long bear market, it is not possible to guess when enthusiastic buying will reoccur. We have to point out to our readers, that most investors think the bear market ended in March of 2003 when a major bear market rally started, so first they have to learn that we are still in a severe bear market. This will of course occur later this year at lower price levels.
I have written extensively over the past three years on progress of the bear market, in explaining the Elliott Wave Principal and the great importance of selecting suitable asset classes in order for portfolios to have a good chance of survival in a long and severe bear market. I have not made a strong point about aiming for the return of your capital before you worry about the return on your capital. This brings up the importance of choosing the right place in the risk spectrum between conservative and aggressive. As we get closer to the next major leg down in the market, it is time to emphasize the great importance of this choice. Fortunately, in our portfolios, it is relatively easy to make mid course corrections when needed. Readers should read our essay immediately before this one on FSO which was devoted to this subject.
MY MISSION ON THE INTERNET
I have been writing on the Internet for nearly 3 years and my objective has changed over the years due the needs expressed by my readers. The big need in their letters was for objective advice they could use in their own investing. Readers wanted unbiased advice from someone who had made many mistakes over a long period and had learned how to avoid or correct them. I surely met that requirement after 64 years if investing.
My writing now is greatly affected by information from my readers and I try to keep them up to date on my own learning experience. I am constantly on the lookout for additional funds and stocks that can be added to our portfolios. Hardly a day goes by without my comparing a new fund or stock to the ones in our recommended list. We always choose the best that are available.
Is it safe to make changes in an existing portfolio? Yes, if you have the time and inclination but it probably is not necessary with a conservative portfolio. In a volatile portfolio, it may be more essential depending on the circumstances. I spend 8 hours on my computer every day and do not hesitate to make changes for good reasons.
Dr. JOHN HUSSMAN AND GOLD
I have been a great fan of Dr. John Hussman since I discovered his two funds last year. I own both of them and will continue to do so. I read his weekly internet reports on Mondays and a few weeks ago became aware that he is human and can make mistakes. He decided to acquire a 12% gold position in the total return fund at the time the Elliott Wave chart was predicting a major gold bear market. Now, I assume that Hussman, along with the thousands of other Ph.D. economists in the U.S., knows nothing about the EW theory. In recent months, I have written him 4 letters about a number of subjects including Elliott Wave, but have had no response. I do not know whether he has seen them.
Since April, the Total Return fund’s chart on my FastTrack screen has mimicked the price of gold. The high price of the fund was a 10.2% gain for the year in April, followed by a low of 0.7% and a current price gain of 1.7%. This price dip of almost 10% is the greatest that either of the two funds have experienced in their life to date. The fund’s low price occurred at the exact end of a bearish wave in gold and the slight rebound is due to the present bear market rally in gold. At the end of the current rally, gold, according to Prechter, will be going down for many months while just about everyone else recommends buying. We will have to wait and see who is right. I stand with Prechter’s views so long as he is proved to be right.
I am sure that Dr Hussman is capable of learning from experience and correcting any mistakes. I have not lost faith in his ability. It may be that this price low is a good buying opportunity. I guess that I’ll send him a copy of this page because knowledge of EW will make him an even better portfolio manager. Someday, probably not in my short remaining lifetime, America’s leading economists will learn to use and follow the Elliott Wave Principal. After all, it’s only 70 years since Ralph Elliott published his great discovery of an important new natural law. If I’m correct, it took even longer for everyone to believe that the world went around the sun, not the reverse.
CURRENT LISTING OF RECOMMENDED ASSET CLASSES
A year ago, we were able to specify at least 3 major asset classes, several unique, and others with duplicates we could select. Now, with more market experience, both our number of choices and duplicates has lessened. The stability of those removed was not good enough. This has been partly alleviated by introducing a class of long term stable assets which are very attractive for all but short term investors (less than about ten years). So the net result is that, with 4 well defined asset classes, we can provide attractive portfolio suggestions for both short and longer term needs.
Stable Asset Class - A key part of all portfolios - Use 35 - 60% of this class
Hussman
Growth Fund - 100% hedged for stability
Short Tern U.S. Treasury Bond Funds
Short Term Foreign Government Bond funds
Hussman Total Return Income Fund - 30% bond hedge
Stable Long Term Asset Class- Use for time periods over ten years - Use 20- 50%
Permanent
Portfolio Fund - 33 year old fund with 6 asset classes
Food and Agriculture Fund - fairly low historic volatility
Bond and Stock Income funds - Morningstar Conservative Allocation Group
5 star funds
Bond and Stock Income fund -
" *
Moderate Allocation Top fund in class
WTR NYSE Large Water Co. - Long fairly stable history, dividend
paying stock
PCL NYSE Timber Co. REIT - Especially for longer duration portfolios
Volatile Asset Class - Use in smaller amounts to provide rebalancing profits
Select
Small Gold and Silver stocks - Use up to 10-20% of this class
Precious Metals Mutual Fund
CEF Closed End Gold/Silver Bullion stock AMEX
ASA "
" Gold Stock NYSE
Oil/Gas stocks
Large Energy Mutual Fund
Natural Resource Fund
Short Funds - Reverse Index and Fully Managed. Use 10% or more of this class
Reverse
S&P 500 Index
" Nasdaq
Index
" U.S. 30 Yr. Bond
Fully Managed fund
The stable assets are to provide a safe reserve from which to transfer assets to other classes when they are at price lows. This transfer is made by doing a portfolio rebalancing in which all asset classes are returned to their original proportions.
It is normal and to be expected that, at market lows, the portfolio assets will, at first, be less than the starting value, but will become positive at market highs. Over time, more and more profits will come from rebalancing operations.
A VERY CONSERVATIVE PORTFOLIO
STABLE ASSETS
Short Term
Treasury Bond fund 30%
Hussman Growth
fund
20%
Prudent Global
Income fund 30%
Total
80%
LONG TERM STABLE ASSETS
Permanent
Portfolio fund
10%
VOLATILE ASSETS
Precious
Metals fund
0%
SHORT ASSETS
Prudent Bear fund
10%
Total 100%
With 80% of stable assets, this portfolio will be the most stable of any described in this essay. We include the 20% of volatile elements to provide some bear market protection and modest profits. Although rebalancing will have the least effect in this portfolio due to the fact that only 20% of the portfolio will be providing major profit opportunities, nevertheless, this portfolio will benefit from rebalancing every two or three years or at major market tops and bottoms. Please note that, in the stable category, we use equal amounts of U.S. and foreign bonds to neutralize the effects of a drop in the value of the dollar.
A CONSERVATIVE PORTFOLIO
STABLE ASSETS
Hussman Growth
fund
40%
Prudent Global
Income fund 20%
Total
60%
LONG TERM STABLE ASSETS
Permanent
Portfolio fund 20%
VOLATILE ASSETS
Precious
Metals fund
10%
SHORT ASSETS
Prudent Bear fund
10%
Total 100%
This very simple portfolio will enjoy modest profits from all components, It will provide profit opportunities from the 3 most volatile asset classes and should be rebalanced periodically to bring the portfolio back to its original percentages. We suggest that one of the precious metals funds with smaller assets be selected instead of a fund already too large for good results in the future.
A MODERATE RISK PORTFOLIO
STABLE ASSETS
Hussman Growth
fund
30%
Prudent Global
Income fund 20%
Total
50%
LONG TERM STABLE ASSETS
Permanent
Portfolio fund
20%
VOLATILE ASSETS
ASA Gold
Stock (NYSE)
10%
CEF
Gold/Silver Bullion (AMEX) 10%
Total
20%
SHORT ASSETS
Prudent Bear fund
10%
Total 100%
As I have explained in earlier essays, I prefer to use the two unique closed end funds, ASA and CEF, because they have a fixed amount of assets and will not be flooded with new cash when the great big gold rush occurs from the public. The big price gains will come from the smaller stocks which cannot be bought in effective amounts by huge mutual funds. This portfolio can be effectively rebalanced at the major gold or general stock market peaks, or both.
AN AGGRESSIVE RISK PORTFOLIO
STABLE ASSETS
Hussman Growth
fund
20%
Prudent Global
Income fund 20%
Total
40%
LONG TERM STABLE ASSETS
Permanent
Portfolio fund
8%
Largest American
Water Stock 8%
Food &
Agriculture Mutual fund 8%
Total
24%
VOLATILE ASSETS
ASA Gold
Stock (NYSE)
6%
CEF Gold
Silver Bullion AMEX 7%
Natural
Resource Stock/Fund
7%
Total
20%
SHORT ASSETS
Prudent Bear fund
16%
Grand Total 100%
This portfolio has more than 40% of the assets in volatile and short categories which makes it quite aggressive but we gave it a stable percent of 52% from our rule that divides the long term stable category equally between volatile and stable. The seven assets not in the stable category will provide many profit opportunities if rebalancing is done at the proper time. I would not expect this portfolio to cause any sleepless nights for an experienced investor, but do expect some very good returns from all asset classes over time.
GENERAL DISCUSSION
No one can predict how this next bear market leg will play out. It could be a slow steady decline in prices or it could involve a real crash involving most everything. In the latter case, the above portfolios will react in order of their planned volatilities. In such an event do not do anything quickly from emotion but add up the values of each asset class. If there is a wide difference from the original asset distribution, this would be a good time to rebalance. the portfolio.
We have placed the Prudent Bear short fund in every one of the portfolios. It is the easiest asset to justify being in the portfolio because in a bear market, it surely will be profitable. It is fully managed by an experienced manager, David Tice, who has done very well in building profits over the past 4 bear market years.
Anyone reading this essay is free to use the information any way that he or she sees fit. There should be enough information to permit you to do so. If not, send mean an e-mail with specific questions I will try to answer.
As we write, the stock market is still in Elliott Wave 2 up, so there may be a few days time before wave 3 down will begin. This will not arouse the masses but may alert a few professionals to recognize we are in a serious bear market. We wish all our readers the very best of investing and good success.
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© 2004 Robert B. Gordon, Sc.
D.
Dr,
Gordon's Editorial Archive
Robert
B. Gordon, Sc. D.
Sun City West, Arizona
June 20, 2004
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